New Delhi: International Monetary Fund (IMF) Chief Economist Gita Gopinath India’s policy actions – from free food for the poor to health care spending and the RBI’s stance – reveal many positives. Responding to TOI’s queries over e-mail, he suggested that the government may need to provide incentives to vulnerable households, SMEs and increase education and capital expenditure. Part:
Does the government need to provide more financial incentives to spur growth?
Given the ongoing health crisis, fiscal policy should provide agile and flexible policy support to respond to COVID-19 related developments. The government’s announcement to provide additional support to mitigate the social cost of the pandemic, including expansion of free food rations, additional spending on health infrastructure and provision of free vaccines to states, is welcome.
Going forward, additional fiscal incentives could be deployed to support vulnerable households and small and medium-sized firms, and to support states for other priority spending, such as on education and capital spending. It is important that a credible financial consolidation plan is announced for the medium term along with such support as this will strengthen market confidence. In addition, structural reforms, including in the financial sector, will be required to boost India’s growth potential.
When do you see the easing of monetary policy in the US and Europe? How can emerging economies prepare to meet the challenge?
In our July 2021 forecasts, we expect major central banks to keep policy rates unchanged until next year. If our baseline outlook and fiscal policy assumptions for the US are realized, policy rates will need to rise in late 2022 or early 2023 (asset purchases can be rolled back in the first half of 2022). For the euro area, given that inflation is projected to remain below target for some time, we expect policy rate increases there to take even longer.
However, this assessment also has risks. If inflation stabilizes more than expected in the US, or if inflation fears simply increase, it could lead to a sudden re-evaluation of the inflation and monetary policy outlook resulting in a sharp tightening of financial conditions. Such tightening would have an adverse effect on emerging markets, particularly for countries where recovery is still nascent, policy space is limited, and public and private sector leverage is high.
In such countries, it would be prudent to prepare for higher rates by extending debt maturities where possible, especially for large foreign currency borrowers, and to prevent further accumulation of balance sheet mismatches.
In India, given the large, negative impact of the pandemic on growth as a result of the second wave, amid unprecedented uncertainties, reserve Bank of IndiaA liberal monetary stance is appropriate with adequate system liquidity through various instruments. Looking ahead, a well-communicated plan for a gradual exit from exceptional monetary policy support, as the recovery strengthens, will spur orderly market change. The use of term reverse repo by RBI and restoration of cash reserve ratio to 4% in a phased manner are welcome steps towards preparing liquidity management tools for the recovery phase. India’s large foreign exchange reserves provide some relief against spillovers from monetary policy recalculations in advanced economies.
How does protectionism in India compare to other countries? Do you think this will impact the investments needed to fuel growth?
In recent years, India has taken significant steps to further liberalize its policies on foreign direct investment and has implemented a number of measures to facilitate trade. In fact, despite the escalation of the Covid-19 crisis and global uncertainties, India has managed to attract significant FDI, about 2% of GDP in 2020. However, the increase in intermediate goods tariffs remains a concern as the government seeks to strengthen integration into global value chains. Further efforts towards trade and investment liberalization aided by structural reforms can help deepen integration into global value chains and support India’s growth potential.
The government has unveiled the agenda of massive privatization. Is this the right time to go ahead with such a plan?
A comprehensive privatization plan, coupled with concrete steps in the short and medium term, can increase transparency and trigger the necessary complementary market and institutional reforms that maximize success. International experience with privatization suggests that a sound regulatory framework is also needed to realize the benefits of privatization, including a well-functioning legal system, an effective and independent regulator and strong property rights. Enhancing the governance and management of state-owned enterprises is also important to ensure that the government gets the best value through better SOE performance and lower financial risk.
What is the best strategy for the government to collect revenue?
There is significant scope for revenue mobilization in India, primarily under the GST and direct taxes, through a combination of base expansion, higher rates and better revenue collection. Gradual phasing out of mandatory e-invoicing, measures to reduce compliance burden and improvement in enforcement are among the efforts that can help in this regard.
How will the ban on Chinese capital affect investment in India?
in spite of covid Due to the crisis and heightened global uncertainties in the previous year, India managed to attract significant FDI of around 2 per cent of GDP in 2020. Portfolio equity inflows also gained a strong momentum, especially in the second half of the last financial year. Efforts to liberalize policies on FDI and portfolio flows in recent years have supported investment in India. Further efforts to broaden them, including trade and investment liberalization, along with the announced structural reforms are crucial to retain India as an attractive destination for foreign investment.
Does the government need to provide more financial incentives to spur growth?
Given the ongoing health crisis, fiscal policy should provide agile and flexible policy support to respond to COVID-19 related developments. The government’s announcement to provide additional support to mitigate the social cost of the pandemic, including expansion of free food rations, additional spending on health infrastructure and provision of free vaccines to states, is welcome.
Going forward, additional fiscal incentives could be deployed to support vulnerable households and small and medium-sized firms, and to support states for other priority spending, such as on education and capital spending. It is important that a credible financial consolidation plan is announced for the medium term along with such support as this will strengthen market confidence. In addition, structural reforms, including in the financial sector, will be required to boost India’s growth potential.
When do you see the easing of monetary policy in the US and Europe? How can emerging economies prepare to meet the challenge?
In our July 2021 forecasts, we expect major central banks to keep policy rates unchanged until next year. If our baseline outlook and fiscal policy assumptions for the US are realized, policy rates will need to rise in late 2022 or early 2023 (asset purchases can be rolled back in the first half of 2022). For the euro area, given that inflation is projected to remain below target for some time, we expect policy rate increases there to take even longer.
However, this assessment also has risks. If inflation stabilizes more than expected in the US, or if inflation fears simply increase, it could lead to a sudden re-evaluation of the inflation and monetary policy outlook resulting in a sharp tightening of financial conditions. Such tightening would have an adverse effect on emerging markets, particularly for countries where recovery is still nascent, policy space is limited, and public and private sector leverage is high.
In such countries, it would be prudent to prepare for higher rates by extending debt maturities where possible, especially for large foreign currency borrowers, and to prevent further accumulation of balance sheet mismatches.
In India, given the large, negative impact of the pandemic on growth as a result of the second wave, amid unprecedented uncertainties, reserve Bank of IndiaA liberal monetary stance is appropriate with adequate system liquidity through various instruments. Looking ahead, a well-communicated plan for a gradual exit from exceptional monetary policy support, as the recovery strengthens, will spur orderly market change. The use of term reverse repo by RBI and restoration of cash reserve ratio to 4% in a phased manner are welcome steps towards preparing liquidity management tools for the recovery phase. India’s large foreign exchange reserves provide some relief against spillovers from monetary policy recalculations in advanced economies.
How does protectionism in India compare to other countries? Do you think this will impact the investments needed to fuel growth?
In recent years, India has taken significant steps to further liberalize its policies on foreign direct investment and has implemented a number of measures to facilitate trade. In fact, despite the escalation of the Covid-19 crisis and global uncertainties, India has managed to attract significant FDI, about 2% of GDP in 2020. However, the increase in intermediate goods tariffs remains a concern as the government seeks to strengthen integration into global value chains. Further efforts towards trade and investment liberalization aided by structural reforms can help deepen integration into global value chains and support India’s growth potential.
The government has unveiled the agenda of massive privatization. Is this the right time to go ahead with such a plan?
A comprehensive privatization plan, coupled with concrete steps in the short and medium term, can increase transparency and trigger the necessary complementary market and institutional reforms that maximize success. International experience with privatization suggests that a sound regulatory framework is also needed to realize the benefits of privatization, including a well-functioning legal system, an effective and independent regulator and strong property rights. Enhancing the governance and management of state-owned enterprises is also important to ensure that the government gets the best value through better SOE performance and lower financial risk.
What is the best strategy for the government to collect revenue?
There is significant scope for revenue mobilization in India, primarily under the GST and direct taxes, through a combination of base expansion, higher rates and better revenue collection. Gradual phasing out of mandatory e-invoicing, measures to reduce compliance burden and improvement in enforcement are among the efforts that can help in this regard.
How will the ban on Chinese capital affect investment in India?
in spite of covid Due to the crisis and heightened global uncertainties in the previous year, India managed to attract significant FDI of around 2 per cent of GDP in 2020. Portfolio equity inflows also gained a strong momentum, especially in the second half of the last financial year. Efforts to liberalize policies on FDI and portfolio flows in recent years have supported investment in India. Further efforts to broaden them, including trade and investment liberalization, along with the announced structural reforms are crucial to retain India as an attractive destination for foreign investment.
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